Info

Notice we have simply increased every item by 20 percent. The numbers in parentheses are the dollar changes for the different items.

Now we have to reconcile these two pro formas. How, for example, can net income be equal to $240 and equity increase by only $50? The answer is that Computerfield must have paid out the difference of $240 - 50 = $190, possibly as a cash dividend. In this case, dividends are the plug variable.

Suppose Computerfield does not pay out the $190. In this case, the addition to retained earnings is the full $240. Computerfield's equity will thus grow to $250 (the starting amount) plus $240 (net income), or $490, and debt must be retired to keep total assets equal to $600.

With $600 in total assets and $490 in equity, debt will have to be $600 - 490 = $110. Since we started with $250 in debt, Computerfield will have to retire $250 - 110 = $140 in debt. The resulting pro forma balance sheet would look like this:

Treasury Point has a cash flow forecasting tutorial in its "Knowledge" section (www. treasurypoint.com)..

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

II. Financial Statements and Long-Term Financial Planning

4. Long-Term Financial Planning and Growth

© The McGraw-Hill Companies, 2002

PART TWO Financial Statements and Long-Term Financial Planning

Managing Your Money At All Ages

Managing Your Money At All Ages

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